Y = C + I + G C= 0 + 1 (Y-T) 0 =20 1 =0.6 G=T=15 I=30 The above describes a simp
ID: 1231541 • Letter: Y
Question
Y = C + I + G
C=0+1(Y-T)
0=20
1=0.6
G=T=15
I=30
The above describes a simple closed economy.
1) what is equilibrium GDP?
2) what is the marginal propensity to save out of disposable income?
3) what is the average propensity to consume out of disposable income (at equilibrium GDP)?
4) what is the value of the expenditure multiplier?
5) what happens to GDP if G rises by 10 but is simultaneiously financed by an increase in taxes?
6) what are the key assumptions being made in calculating these multipliers?
7) What will be the slope of the IS curve?
I've done 1~6 but I'm not sure if i've done it correctly, and for the last one, I have no idea.
Explanation / Answer
1) Aggregate Expenditure AE = C + I + G + (Exports - Imports) = a0 + a1(Y-T) + I + G + (0-0) = 20 + 0.6(Y-15) + 30 + 15 At equilibrium GDP AE = Y substituting in forst equation Y = 20 + 0.6(Y-15) + 30 + 15 Y = 0.6Y - 9 + 65 0.4Y = 56 Y = 140 GDP at equilibrium = 140 2) Marginal propensity to save = 1 - (change in C per change in Y) = 1 - (dC/dY) = 1 - d/dy (a0 + a1(Y-T)) = 1 - a1 = 1 - 0.6 = 0.4 3) Average propensity to consume = delta C/delta (Y-T) = a1 = 0.6 4) Expenditure multiplier = 1/ (1- slope of AE) slope of AE is 0.6 from Q1 Expenditure multiplier = 1/(1-0.6) = 1/0.4 = 2.5 5) G raises by 10 => increases GDP by 10 T also raises by 10 => decreases GDP by a1*10 = 0.6*10 = 6 So overall GDP increases by 4 6) assumptions are that I and G are independent of income Y 7) IS curve is defined by the equation Y = C + I + G + (Exp - Imp) I is a function of interest rate (on Y axis) Y is income (on X axis) In this case I is constant at 30, meaning interest rate does not change though the income Y changes, means IS curve is horizontal So slope of IS curve is Zero :) thanks in advance for rating! :D
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